Can Regulation 37A OF SEBI LODR, 2015 affect the ease of doing business???

“Ease of doing business” has been the catchphrase of this decade isn’t it? But what is the reality of it? For finding out that lets see this one provision of SEBI LODR which challenges it….The regulation which I want to discuss here is “Regulation 37 A” of SEBI LODR, 2015.

 

WHAT IS THE REGULATION ABOUT??

 

37A  Sale, lease or disposal of an undertaking outside Scheme of Arrangement.

(1) A listed entity carrying out sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking of such entity or where it owns more than one undertaking, of the whole or substantially the whole of any of such undertakings, shall –(a) take prior approval of shareholders by way of special resolution;

Provided that such a special resolution shall be acted upon only if the votes cast by the public shareholders in favour of the resolution exceed the votes cast by such public shareholders against the resolution:

 

FIRST LET US UNDERSTAND, WHAT IS AN UNDERTAKING?

 

According to Section 180 of Companies Act, 2013

(1) The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely:—

(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.

Explanation.—For the purposes of this clause,—

(i) “undertaking” shall mean an undertaking in which the investment of the company exceeds twenty per cent. of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates twenty per cent. of the total income of the company during the previous financial year;

So we are clear on what an undertaking is.

 

NOW WHAT ARE THE SCENARIOS THIS REGULATION WILL BE APPLICABLE?

 

• Regulation 37A read with Section 180
• Regulation 37A read with Regulation 24(5) and Section 180
• Regulation 37 A read with Regulation 24(6) and Section 180
• The 4^th Scenario is when above 3 are done with a related party...

 

WHAT IS REGULATION 24 (5) & (6) ABOUT??

 

 24(5) A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than or equal to fifty percent or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting

 24(6) Selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution.

We have understood what is an undertaking, what is regulation 37A, what are the scenarios this becomes applicable. Now comes the real question, how does it affect the ease of doing business??

If you had paid attention to the above, you could have noticed the provision of the regulation which is the real challenge. The provision says the “special resolution shall be acted upon only if the votes cast by the public shareholders in favour of the resolution exceed the votes cast by such public shareholders against the resolution.” Which means the votes of promoter and promoter group is of no use to passing of such resolution.

Already we have seen in regulation 23(4) that “no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not”. But here even though we are not doing transaction with related party, the votes of promoter and promoter group are given but are of no use it.

• For example, let us take the ordinary business of a company is trading of securities and they are the major source of income to that company. We can say that if the conditions under section 180 satisfy, then sale of such investments will become sale of undertaking. Here in this scenario where you are doing your ordinary course of business only, yet you need public support to approve it. Further the main thing is that you are not even selling this to a related party.
• If we see the track record of public shareholding in listed companies in India, except few companies it has not been so great. Further the country is not new to hostile takeovers, so imagine if a competitor buys the public shares, votes against and create chaos to run your ordinary course of business, there is nothing that can stop them.
• Some of you might have thought why we have to complicate this much, when we are selling an undertaking outside scheme, we can transfer shares of the company to that party and he will definitely vote in favour and he is also not a related party.

 

Like this you should not think…..

 

Because there is another provision in that regulation which says “Provided further that no public shareholder shall vote on the resolution if he is a party, directly or indirectly, to such sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking of the listed entity.”

No loopholes, nowhere to run or hide. The moral of this regulation is you need public support to run your business.

At the end, you might ask, so what is the answer to the question?? I just want to tell one thing…

 

Ease of business is like RCB winning the trophy, it can happen, but we don’t know when…

 

Thank you for your time…!!!

Here's a summary of the above article

Section	Details
Introduction	Ease of doing business is a popular catchphrase of this decade. However, Regulation 37A of SEBI LODR, 2015 challenges this concept.
Regulation 37A Overview	Regulation 37A deals with the sale, lease, or disposal of an undertaking outside a scheme of arrangement. It requires a special resolution for such actions, with the condition that the resolution is only valid if the votes cast by public shareholders in favor exceed those against.
Definition of Undertaking (Section 180 of CA, 2013)	An undertaking is defined as one where the company’s investment exceeds 20% of its net worth or generates 20% of total income in the previous financial year.
Applicable Scenarios	1. Regulation 37A with Section 180 2. Regulation 37A with Regulation 24(5) & Section 180 3. Regulation 37A with Regulation 24(6) & Section 180 4. When the above are executed with a related party.
Regulation 24(5) & 24(6) Overview	Regulation 24(5): Prohibits listed entities from disposing of shares in a material subsidiary that would reduce shareholding to 50% or less without a special resolution. Regulation 24(6): Requires a special resolution for selling, disposing, or leasing more than 20% of the material subsidiary's assets.
Challenges to Ease of Doing Business	The special resolution in Regulation 37A requires majority approval from public shareholders, excluding the votes of the promoter group. This challenges the ease of doing business, as companies may face difficulties in getting approval even for actions in the ordinary course of business. Hostile takeovers and public shareholder opposition can also create hurdles.
Conclusion	Regulation 37A emphasizes the need for public support to conduct business. This regulation complicates the ease of doing business, drawing a comparison to the unpredictability of RCB winning a trophy, indicating that ease of business may be possible, but it's uncertain when it will be achieved.

 

 

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